Is it making your Free Trials more effective at creating customers? Coming up with the right Pricing? How to handle Competition? Whether to go Freemium? Overall Business Model issues? How to handle Accounting? How to Manage Recurring Revenue? How to keep Churn to a minimum? Or something else?

I’d love to hear from you – whatever the challenge – in the comments below.

Next week I’ll aggregate your comments, responses from those on my mailing list, and insights from Free Trial Dominator members to give you an idea of what your peers consider to be challenges in 2012.

Happy New Year!

– Lincoln (972) 200-9317

PS: If your challenge in 2012 is how to turn your Free Trial into a Customer-Creating Machine, the solution is to become a Member in my Free Trial Dominator program.

That’s a Paypal link, by the way, but you only need a valid Credit Card to make it work.

And when you join the Free Trial Dominator, you’ll get access to all of this:

I get asked what the average Free Trial conversion rate is or “what’s a good conversion rate” all the time.

But since I’m not an analyst or researcher I don’t have industry-wide data, but even if I did, well… you’ll see.

Softletter (the SaaS University folks) on the other hand collects and publishes this type of information, so we’ll look at their stuff.

A brief disclaimer: I don’t like this kind of survey data because it lumps all SaaS & Web App vendors together and – other than a shared business architecture – they offer different types of products with different use cases that serve different industries, verticals, niches, and markets that all behave very differently from one another… but, this is what we have to work with so it’ll have to do for now.

What Softletter published indicates that 66% of SaaS vendors report Free Trial conversion rates of 25% or less.

That means that for most SaaS vendors – 66% of them – at least 75 out of every 100 sign-ups they get for their Free Trial DO NOT BECOME CUSTOMERS.

75% of the time, it fails every time.

Even more interesting – or frightening – is that 41% of SaaS vendors reported <10% conversions to Softletter!

So let me once again point out the obvious… for 41% of SaaS vendors, >90% of the people that sign-up for their Free Trials DO NOT CONVERT TO PAYING CUSTOMERS.

In real numbers, for 41% of the SaaS vendors Softletter talked to, 90 out of every 100 free trial sign-ups does not result in a paying customer.

And this < 10% number is closer to the reality that I’ve seen when folks first contact me to help them improve their Free Trials.

And frankly… that sucks. (Ugh… language)

I’m sorry, but all of these numbers suck… even the 25% conversion rate.

But the thing I hate about “averages” or data like this is it might make someone with a 26% conversion rate think “WOW! We’re doing great!”

I literally had someone tell me the other day “we have a 29% conversion rate so we must be doing good…” to which I said nothing and simply shed a solitary tear.

Like it or not, when average numbers are put out by industry experts, analysts, researchers or pundits… people make those numbers their goal.

They shoot for the average.

They plan and strategize around the average numbers they put in their spreadsheets!

Now when someone tells me 29% is a good conversion rate for a SaaS Free Trial – and if I’m not rendered speechless – I gently remind them that they’re still losing 71% of their sign-ups.

Yes, at a 29% conversion rate – what someone might consider good – for every 100 sign-ups you get, 71 will be squeezed out of your sales process.

71 out of 100.

To me, that represents wasted ad spend, marketing costs, support and infrastructure resources, and lost potential revenue.

Yeah, you know what? Forget the costs; this is money left on the table!

So 71% of your Free Trial sign-ups opting not to give you their money when you had their attention in the ONLY PART of the sales process you have any real control over is aFAILURE, even if you are doing better then everyone else.

Unfortunately, Softletter published the data in their newsletter and don’t have the archives available to the public so I can’t link directly to it. Maybe you can find it on their site somewhere.

Softletter also noted that 15% of the SaaS vendors reported 70% or better conversion rates, which sounds great on the surface.

But then they followed that up by saying these are what most people would refer to as “enterprise” sales cycles and “a great deal of personal interaction takes place and in many cases a trial program is not launched unless a great deal of pre-sales qualification has taken place.”

One of the goals of a Free Trial strategy should be to reduce the amount of human interaction required to make a sale, even if there is a customer-side requirement for a “higher-touch” sales process, which – by the way – is often just a customer perception requirement.

You can do things within the Free Trial process to streamline and create a more scalable (read: leverage through proper Free Trial strategy) sales process as a whole.

But to do that – whether with a low-touch, self-service, e-commerce-based sales model or high-touch, human-centric sales model – you really need to understand the true nature of a Free Trial, the four phases – Attention, Engagement, Investment, and Conversion, and know how to create and execute a strategy around your Free Trial.

Sure, the 30-day Free Trial is common among B2B SaaS & Web App vendors, but there aren’t any rules.

And with everything from 14-day to 60-day (and longer) trials appearing frequently I understand why this the question persists.

So, the short answer to what the ideal Free Trial period is “there isn’t one, but…”

The longer answer – one that will actually help you make smart decisions with your SaaS Free Trial strategy – requires some setup and a going a little deeper into what Free Trials are really all about.

First, you need to understand that Free Trials – from the vendor standpoint – are not there for the user to evaluate the product.

Nope, Free Trials have one job and that is to create a customer.

A well-designed Free Trial strategy should create an efficient, scalable and cost-effective method of customer acquisition.

One of the key psychological elements of a Free Trial is its time-limited nature.

Paradoxically then, the quest for the mythical “ideal Free Trial length” is a red herring.

Look, when it comes to the length of a Free Trial, many people want to believe there is a magic number – 7, 14, 15, 30, 45, 60, 90; like playing the lottery – that when applied to their Free Trial will skyrocket conversions.

And of course the flipside of that way of thinking is that if the Free Trial isn’t converting customers, it must be the length that is the culprit.

But very rarely – never in my direct experience – does the length of the trial have a major impact on conversions.

From the customer side, if the trial is perceived to be too short, they might feel rushed and not get started.

Even worse, they might not sign-up in the first place.

So it can cause a problem in the Attention Phase of the Free Trial.

And there are examples of using shorter trial periods to position a product or a version as simple; like how Salesforce.com has a 7-day trial on their simple Contact Management product vs. a 30-day trial on their “Enterprise” product.

But without the immediate version differentiation or an “anchor” trial length for comparison against, a short trial length may actually do massive damage up front.

Now, from your standpoint as the vendor, you want to get them into the trial and convert’em ASAP.

Yes, ASAP!

That means not waiting until the end of the trial to convert, but leveraging the Free Trial experience, and using a strategic view of the Free Trial, as a way to accelerate customer acquisition!

In my experience, the average time from sign-up to conversion with a 30-Day Free Trial is… 31 days.

That’s because SaaS and Web App vendors like you simply don’t understand how to use a Free Trial to efficiently create customers.

You think Free Trials are for “evaluation” or that your product will sell itself once they get in there.

Let’em poke around and they’ll see just how awesome your app is, right?

Maybe you send an email reminding them that their trial is expiring soon and hope the user will be like “oh, yeah… my trial is expiring, I guess I better sign-up!”

Right… good luck with that.

Look, the ideal Free Trial length from the customer standpoint – what you use in your marketing – is one that gives the perception of being long enough to adequately evaluate the product and not feel rushed.

From your side – the vendor side – however, the ideal Free Trial length is as short as possible!

And to make it as short as possible, you really need to understand the true nature of a Free Trial, the four phases – Attention, Engagement, Investment, and Conversion, and know how to create and execute a strategy around your Free Trial.

Let’s Optimize your SaaS Marketing Funnel

For immediate consultation and advice on optimizing your Marketing Funnel and improving Free Trial conversions, schedule at least a 15-minute meeting with mevia Clarity. If you feel a more involved engagement is required for me to help you,email me with the specifics of your situation (as much detail as you’re comfortable giving) and we’ll setup a meeting to work through the particulars.

You have 6 days – including today – until the year 2011 is over and done with.

So what are you doing to convert those currently in your Free Trial to customers in 2011?

It isn’t too late to convert them!

I’m willing to bet that you have some users in your Free Trial that signed-up at a point in December 2011 who, if they convert on the last day of their trial, will convert well into 2012.

Now I’m no accountant, and there are different ways to book revenue, but a trial started in 2011 that converts in 2012 doesn’t usually count toward 2011 revenue.

And since you spent the money in 2011 to get them to your site and to sign-up for the trial in the first place, wouldn’t it be great to get some money from them this year?

I want to convert them in 2011 to maximize my revenue for this year AND I want to start off 2012 with THAT MUCH MORE recurring revenue!

So… what if you could take some small action that would result in the conversion of 10% of your current prospects to customers in 2011?

25%?

50%?

Well, have you thought about simply asking for the sale right now? Today?

This really shouldn’t be as wild of an idea as it is, but far too many SaaS and Web App vendors think that their product will magically sell itself, I guess.

You’d think that the super-low conversion rates most vendors get from their Free Trials would be the first indication that this strategy is failing.

So ask for the sale.

And here are two ideas on how to do just that.

Sit down and craft an email that is written by a human for a human, keeping in mind that a real person will read your email.

Make the email more about them and their needs than you and your product.

And make them an offer to convert right now.

Give them one thing to do in the email – click a link – and send them to a page to enter payment information and become a customer.

Make sure that page is a marketing page that reminds them why they should convert today, and includes trust factors, social proof, etc. – in other words not just an info-collecting page.

Now… if you know what version, bundle, or tier they signed-up to try out, we can get fancy and come up with a truly irresistible offer… a discount on the next level up.

This is one of my super-secret Ninja techniques that works like crazy all day long.

Consider this… if they signed-up for the trial at the $20/mo level, and the next level up is $40/mo… offer them the $40 level for only $30/mo for the first 6 months.

Of course, that assumes you created pricing tiers differentiated on value-based metrics/features/benefits and you’re able to make that next level up sound really cool or valuable, that you tied your trials to the different tiers, etc. but you get the idea, right?

Honestly, there are a lot of ways to convert prospects to paying customers, and many of those are especially applicable right now at the end of the year.

I cover all of that – and a lot more – in the Free Trial Dominator program.

That’s a Paypal link, by the way, but you only need a valid Credit Card to make it work.

And when you join the Free Trial Dominator, you’ll get access to all of this:

A common misconception about Freemium is that it is just for startups with nothing to lose. This myth is perpetuated by many of the Freemium advocates whose backgrounds – and current experience – are limited to early-stage, venture-funded startups. Unfortunately, this misconception really misses the point.

Freemium is a marketing strategy – or quite often a tactic – and used most often to disrupt markets, competitors, etc. So, since when is disrupting markets relegated to startups? It is a bad idea to be focused only on the near-term and to miss the big, longer-term picture because of it.

NOTE: I originally published this paper in late 2010 exclusively for subscribers to my Mailing List. Below is the original paper, published in it’s entirety. I’ve provided updates to the numbers I cited at the bottom of this post.

While startups are often the first to market or the first to try new and risky things when it comes to marketing, if something works – or could be made to work by exploring lessons learned by failed startups – often the larger more established companies will come around. And when they do, that could be a big problem for the early-stage startups whose only real value proposition is that they are free.

No matter how you slice it, to really disrupt a market – the odd vendor that got lucky notwithstanding – requires significant capital regardless of whether Freemium is leveraged as the marketing strategy or not. But isn’t it interesting that for a startup to gain significant market penetration and traction using Freemium within the large markets required for the numbers game to work, it must raise significant capital for infrastructure and customer acquisition? Hmmm. It would seem Freemium is quite expensive for the vendor.

Here are some of the popular case studies in Freemium and how much equity capital they have raised to date (in late 2010):

Evernote $45M YouSendIt $53M Box.net $30M Pandora $56M Xobni $32M

So, who cares that you have to raise so much money to get a Freemium business to work? You should. The myth is that the built-in virality of the network effect enabled by Freemium is enough. Obviously it is not. Freemium is almost always associated with low Customer Acquisition Costs – CAC – through word of mouth, viral and game mechanics, social networking, etc. On top of that, with open source stacks and cloud infrastructure the cost – as you often hear – to support a free user is “near zero?” But support costs are just one expense usually not added to the actual CAC even though “near zero” support costs in aggregate at scale often result in something with “near many zeros.”

As was shown in the original “The Reality of Freemium in SaaS” the CAC metric must take into account all of the expenses required to land a paying customer. The true definition of CAC is the aggregate costs associated with discovering, reaching and getting the attention of a potential customer, getting them to your site or calling on them, converting them to a user, serving them (marketing, technology, human services) during the non-paying period, and then converting them to a paying customer.

In a Freemium scenario, you will have on average 97 free users for every 3 paying customers. If you have 10,000 users in the system, on average, 300 will be paying customers. That means, the aggregate CAC for each of those 300 is not what it costs only to attract and convert each of those 300, but what it also costs to attract and support the other 9,700 users while they wait to become customers. And of course, none of this is static so the 9,700 at a given time could include any number that churned out over time.

Some have argued that if you know 95% of your users will never convert then they aren’t customers and should not be figured into the CAC. Whatever it takes to justify your position, do what you will, but know that if you spent $100 on AdWords and got 100 people to come to the site, and converted 3, it was not a CAC of $3… it was a CAC of $100, or just about $33/customer. You have to get real.

If you are in a very small niche where you provide a significant amount of value to your business customers, Freemium should probably be the furthest thing from your mind. There are so many very targeted methods of reaching your customers in ways that add value and raise the value perception of your offering that you don’t need to worry about brand building or market making. Just tell people how you’ll solve their problems or help them take care of new opportunities, charge them for the privilege, and you will likely have a great deal of success.

In large, horizontal markets – especially in B2B – much of the cost associated with Freemium at a large scale is in market-making and brand building. That is, orchestrating the “organic” viral campaigns, greasing the palms of pundits, traditional PR… wait? What? None of that sounds like the Freemium we all know and love, right? The build it, make it free, and let the product sell itself. Yeah, that doesn’t work.

Even if the only costs associated with customer acquisition are the result of directly pulling in users and converting them to paying customers, few companies will look at the CAC correctly – at best forgetting to figure in “user acquisition,” too. But we know – as previously mentioned – the bulk of the expense is not in the highly-targed direct acquisition – a Google AdWords campaign – of Users or Customers.

No, for most, the cost is from the indirect acquisition methods (i.e brand building, PR, market making, etc.) and that is harder to keep in check. In fact, it is too often not calculated properly in the actual CAC and is relegated to other marketing, S&OP, etc. expenses.

How does the specific issue of Customer Acquisition Cost tie to whether Freemium is only for startups with nothing to lose or not? Well, its simple really. The problem with the way most companies leverage Freemium is that CAC goes UP simply because of the way they use it. They emphasize the FREE version rather than the PAID version in order to get “traction.” This simple marketing decision can be the death of a company or the point at which they thrive. No one ever said you MUST go through the free version to get to the paid version.

Yet, most startups are looking to get “traction” and are therefore pushing to get as many free users in the door as possible. Established companies used to generating revenue will be more likely to use Freemium as the marketing method it is but push heavily, from the moment the would-be customer lands on their website, the premium version. Free was what got you to the site, but the value of the premium product is what will get you to stay and pay.

SocialText – founded in 2002, $19M in VC funding over 6 rounds – hardly a startup – is an example of a company that has created a Free version of their service but is not putting all their eggs in the Freemium basket. For instance, they do not emphasize the Free version on their pricing page. In fact, it is not found on their pricing page at all but is instead a special program they have created to be leveraged in other ways.

SocialText can be considered Freemium, and will use that to get traffic to their site, but will de-emphasize the Free tier outside of those specific marketing campaigns. That is – if you come to the SocialText marketing website directly and not via a search for Free or Freemium or not through their carefully orchestrated campaign, Freemium landing pages, etc. then you will not be presented with that opportunity.

But is SocialText really benefitting from Freemium in the way that their competitor Yammer (founded 2008/$15M funding) is? Are they getting the press, the traction, etc. associated with Freemium in the way that Yammer is? It is hard to tell without any level of transparency, but the answer would seem to be no. So in SocialText’s de-emphasizing of Freemium, they are likely not seeing the same level of “traction” that Yammer is. The big question is then – is that a problem?

SocialText by all accounts has a thriving Premium offering and perhaps they are using Freemium to win over customers who bring up Yammer in sales calls. Perhaps it is something more. The interesting thing here is that they HAVE a Freemium offering and could be waiting to unleash it on the market. Yammer – who claims penetration in “80% of Fortune 100” companies as of October 2010 – has an interesting Freemium strategy that will be covered in a separate article.

So, while Freemium startups are out trying to make noise and get the market or industry to notice them, incumbents can leverage the same Freemium tactics of market penetration as the new kids on the block, but without the need to build a brand from scratch. Whereas Freemium startups think they’ll come in and disrupt the status quo with Free and knock the stodgy old-school monoliths off their pedestal, some are being beaten at their own game. Guess what? If Free is your only claim to fame, that is all you’ll get – fame – as you enter the deadpool.

Yes, large established companies are slower to pull the trigger on things like Freemium – many will never attempt it – but for others this “slow and steady wins the race” mentality is because they want to fully think it through. They need to fully understand what happens if it the strategy fails. How will it affect their market position, the brand value, etc. What happens if it is successful? How will it affect their market position, the brand value, etc. There is a very real issue around protecting their brand from the potential of “free = zero value.”

Wherever possible, established companies will look to existing products or services that they’ve already invested in the development or acquisition of but that are new or have yet to establish a strong market presence to experiment with Freemium. Due to the inherent risks of Freemium, this is a great way for a company to try Freemium without damaging an established product line, brand, etc. If you are a startup or are in a market where larger competitors have acquired smaller companies or if you know companies have invested in IP that directly competes with your Freemium offering but they have not yet begun to market it, that should be considered a direct threat.

There are many pitfalls that established vendors will want to overcome, but when they do figure it out, look out. If you see an established company leveraging Freemium, it is likely that they have figured out a specific opportunity to go after, a market segment adjacent to their current position that they want to penetrate, or they might just want to stop competitors in their tracks. And as established brands with a lot of money in the bank, they might just be able to do that.

Amazon Web Services (AWS) would hardly be considered a “startup with nothing to lose” but they recently “went Freemium.” This is a perfect example of a company that is very successful – not a startup – deciding to use “Free” to disrupt their competition and gain even more new market share. While the bulk of the noise in the industry was around their 1-year free trial for their core services – EC2, S3, EBS, ELB – the real news was around a real Freemium offering for their proprietary ancillary services like Queueing, Notifications, and Non-Relational Datastore.

Those services are unique to Amazon and once you are using them – which requires deep integration into your application – you are effectively locked-into AWS at some level. You can always move your app from EC2 to your own data center, you can move your objects from S3 to another file host, but the *services* that AWS provides in those ancillary offerings you cannot (easily) move. Brilliant and very disruptive to other “cloud computing” players.

Another great example of a successful and established company “going Freemium” is Mailchimp. It is true, many people think of Mailchimp as an overnight success since Freemium did its job – it got them noticed. However, the company has been around since 2001 and did not get into Freemium until they had been a successful company for nine years. Mailchimp was looking for a boost – a way to disrupt the status quo in the email marketing industry and knock the leaders down a peg or two. Freemium was the method they chose.

The key to the success of Mailchimp’s Freemium strategy was the fact that they had so much time in-market that they could anticipate and plan for the additional support burden – and system abuse – associated with a surge in free users of an email marketing system. Where they didn’t or couldn’t anticipate challenges, it was that time in-market and experience that allowed them to roll with the punches and make adjustments along the way to make Freemium work.

Startups should take note of that – the additional support and ABUSE that free users would bring was the major challenge with Freemium for Mailchimp. This is where existing companies will have an edge over startups in Freemium – they know what the early-stage companies don’t yet understand. For young companies hanging their hat on Freemium, they need to be very aware of this threat.

My suggestion to any SaaS or Web App company considering Freemium is simple: Make sure you’re targeting a large enough market that would actually want to use your product (B2B or B2C) and then seek out Venture Capital firms that have funded OTHER successful Freemium ventures.

Don’t try to do it on your own, bootstrapped. Freemium requires MASSIVE AMOUNTS OF MONEY and a large enough audience. Without both, Freemium is unlikely to work for you.

“Classical Freemium” is the marketing tactic where a SaaS or Web App vendor offers a Free-in-Perpetuity version of a product or service, often feature- or usage-limited, as well as a version of the same product or service with less limitations to which the vendor will attempt to up-sell the user.

NOTE: I originally published this paper in late 2010 exclusively for subscribers to my Mailing List. Below is the original paper, published in it’s entirety. I’ve provided updates to the numbers I cited at the bottom of this post.

This form of Freemium is actually on the decline as the primary go-to-market method for a number of valid reasons. Aside from the notion of the “Penny Gap” being a very real idea – the idea that trying to charge people *anything*, even a penny, for what they already get for free is a major hurdle – other realities are becoming apparent.

The concept of “near zero” support costs have been found to be “near untrue,” most find it difficult to justify and continue to support a 3-5% conversion rate, and most are realizing what Freemium really is – a marketing tactic and not a business model. Freemium is evolving, however, so there are other types of Freemium that are on the rise which will be covered in a separate article.

There is yet another reason Classical Freemium as the only method of customer acquisition is falling out of favor; many SaaS and Web App companies are realizing that the true motivation behind the Freemium companies they look up to has little to do with revenue generation by converting free users to paid subscribers and everything to do with building a user base as fast as possible without consideration for a sustainable monetization strategies. These companies are instead looking to make money through M&A or IPO activity. If they stumble into a way to make money along the way, great, but that is not the primary motivation. Twitter is a great example of this.

Twitter is a company that continues to raise money ($160M in disclosed VC funding through 5 rounds to date) and spend money to acquire more and more users but still lacks a fully defined monetization strategy. But they are changing the world so we can forgive that, right? The motivation is clearly not to generate revenue but to gain traction and grow the user base. Twitter continues to experiment with different ways to make money such as selling the tweet “firehouse” to Google, Bing, and through data aggregation providers like gnip, or promoted tweets which reportedly pull in $100k a pop, and the recently announced analytics which may or may not be a revenue source.

None of these, however, have emerged as the revenue model they’ll hang the future of the business on. Also of note; all of the revenue streams they have attempted to tap required the critical mass they had already achieved by having a 100% free service. Without the massive funding – and perfect timing and luck – required to get Twitter to the point it is in terms of “market penetration,” the monetization methods they are exploring would not be viable in the first place.

The founders of Twitter have likely already made millions of dollars through private stock sales and the company will likely be able to acquire several additional funding rounds as needed to ensure they stay around long enough to be acquired for billions. In other words, there is a very good chance the founders of Twitter will have built the company and made hundreds of millions for themselves and their investors all while having generated little actual revenue – let alone profit – along the way. Is this bad business? Certainly not. If you are building a business to generate revenue is it a model you will want to copy? Probably not. Twitter has used a risky strategy, to say the least and while it might seem counter intuitive, Twitter is successful probably because there was not a strategy there in the first place; you just couldn’t plan for what they’ve done.

Using Twitter as an example is a double-edged sword since it is an anomaly and difficult to categorize as B2B or B2C. But Twitter is such a pervasive technology service in today’s world that it is a great company to examine from the perspective of Freemium. But if you have a niche or vertical B2B SaaS or Web App, is Twitter really an appropriate analog? Obviously not. But it is a great example of a company being built around Free with little motivation to generate revenue or create profit. It is this piece of the puzzle that could be missing when companies look to Freemium as the go-to marketing method; they don’t fully understand the real motivations behind many of the companies employing Freemium. This is why it very important to know that Classical Freemium does not exist at scale!

You need to know that few companies are able to build a real, sustainable business off of the 3% conversions that most Freemium companies see. Evernote seems to be one of the few, but they are in a great position to play the numbers game required by Freemium. First, they aren’t B2B only; business customers can use the service, but so can anyone else. In fact, Evernote is one of the few companies to say – and mean – that anyone with an Internet-connected device is a potential user / customer. Most companies being honest with themselves cannot say that. So in the B2B world, building a sustainable business off of 3% conversions just doesn’t happen.

Freemium is a marketing method for getting users, for sure. But it is also a marketing method for getting a foot in the door, generating buzz or brand awareness, entering more price-sensitive market segments, or disrupting competitors. These are the scenarios where Freemium is going to flourish in the coming years for most business that leverage it. Few will be pure-play Classical Freemium and have any real success. To date, no B2B company has built and scaled a business through pure-play Classical Freemium – that is, one product line that has a free-in-perpetuity component and one or more premium versions of the same product for the same market segment.

All companies at some point must start generating revenue to remain viable. For many Freemium companies this occurs after they’ve reached some level of scale and either have new investors to answer to (especially post-IPO) or have otherwise reached a critical mass of adoption and now can begin to generate revenue. The thing to take note of is that many companies do not rely on converting free users to paying subscribers but instead rely on other revenue streams than premium versions of the free subscriptions to monetize.

You must have a clear path to monetization regardless of whether you will use Freemium or not and if you do choose it, you must do so on the applicability to your goals, your market, etc. and not because another company is doing it “successfully.” It is necessary to really and fully understand how so-called “Freemium companies” evolve over time.

If you are considering using Freemium as your go-to-market strategy, you must understand this before you choose to employ Freemium in your company. You cannot build your business based on what you see on the outside of these other “Freemium companies”. You don’t know what is going on behind closed doors. From first hand experience, anecdotal accounts, and publicly-disclosed accounts, it is clear that its not what you think!

Freemium seems to work best when the goal is simply to get people into the system and not as part of a monetization or sales strategy. If you create a free product for people to use and not as part of a sales process or what appears to be a free trial with no expiration – Freemium seems to work well. But what does it work well for? Getting users. Not generating revenue. However, if it is obvious that the free product is simply a free trial with no expiration or is limited in ways that ultimately makes it unusable without paying, it will fail to gain traction meaning it won’t even help you get users. People aren’t that stupid.

This is why the most successful and profitable methods of monetization right now in B2C revolve around an entirely free product with monetization through credits, virtual currency, product sales, or add-ons; think Facebook or Zynga. This is why over one-third of the top grossing iPhone apps are are Free, but offer in-app purchases for add-ons (additional levels, characters, chapters, etc.).

Back in the B2B world, we can look to a company like Helpstream, founded in 2004 and having raised just under $10M in VC funding as an example of a company where Classical Freemium failed and took the company with it in early 2010. While it is terrible that they failed, some transparency by the former CEO, Bob Warfield, helped shed some light on what happened. The main takeaway from Warfield’s post mortem was that Helpstream didn’t attract the right kind of users; the kind of users that would convert to paying customers. He said they were able to get 200 free users and convert 5 of those to paying customers; a conversion rate of 2.5% – just under the standard 3% conversion rate.

The biggest problem it would seem based on Warfield’s post is that they simply didn’t have enough traction to make the numbers game work. 200 users is simply not enough. Consider the numbers game here – they would have needed 100x the amount of free users they had to get just 500 paying customers if the conversion rate held. We don’t know what number of customers would have resulted in a sustainable business for the company, though.

The real tragedy with Helpstream seems to be that they didn’t make Warfield CEO earlier. His ideas about market segmentation, having the Freemium version be only for smaller businesses by putting upper limits on it (50 users in their case), and having only a free trial for larger businesses – those who are more likely to become customers anyway seem to be spot-on all things considered. Unfortunately this realization – the realization that basing their entire business on Classical Freemium was a recipe for failure – was just too little, too late; they had already ran out of money!

What is frightening interesting is that some companies are actually developing their pricing and building their business around a goal of 3-5% conversions. A fascinating post from Hootsuite – a builder of social networking tools for B2B marketers with just under $4M in VC funding – where they claim to want to build a business off of 5% conversions are hopefully putting up a smokescreen to the real revenue streams at scale. This quote is from a post clarifying their pricing after they initially released pricing that did not sit well with their customers:

“To determine the pricing levels, we analyzed data from active customers to ensure that 95% of current users would remain free based on current patterns”

Without deviating from the point of this article too much, only looking at usage data to determine pricing is not ideal. It speaks volumes when a company justifies its pricing decision based on data analysis to its users who are upset by the pricing announcement / change. Clearly, the company is not listening to what its users and customers want, but is instead looking at data that doesn’t tell the whole story to find the answers. In this case, they are using data to back into a Freemium Strategy and Pricing Model where 5% of their users will want or need to pay to use the service? Best of luck to them, but this seems like a very bad idea.

What Hootsuite seems to be failing to realize is that companies leveraging Freemium that have a 3-5% conversion rate from free to paid are not happy with that. They want higher conversions, it just seems to be that the nature of Free and the Penny Gap keep that from happening. Some do achieve higher than 3-5% and that should be the goal. Backing into a pricing strategy with a specific conversion rate in mind is a bad idea – and severely limiting. This is why pure-play Classical Freemium does not exist at scale in B2B SaaS; no B2B SaaS company actually sets out to build a system where 97% of the users of their system do not pay.

It would seem that Hootsuite might be falling into the trap of building a business around a marketing strategy employed by those that have no real interest in revenue generation on the product for which they’ve used Freemium. It must be noted Hootsuite has begun to use market segmentation within their marketing website and pricing and Freemium strategy by offering regular customer and Enterprise customers different options. Perhaps they quickly saw the err of their ways.

Here’s the dirty little secret about externally-funded Freemium companies and you must understand this. Most are not out to generate revenue – only grow the user base. Generating revenue and growing a free user base are two very different things and in many cases, doing both well is very difficult in B2B SaaS. For most companies using Free or Freemium, it is as a way to get a large number of users and build an audience. Many of these companies have no intention of getting money from those users – ever. This is so critical for bootstrapped companies or those with just a little external funding. Freemium is a Marketing Strategy used to get a lot of users fast – “hyper scale” as some people have put it. if you don’t have the money to support hyper scaling of a huge free user base, you should not attempt Freemium.

This is hard for the bootstrapped startups with a couple of founders simply looking to replace their corporate income with a SaaS or Web App to wrap their heads around. Why would you do something in your business that is not going to immediately result in revenue – even if it is only 5% of those people that pay? For the founders of companies employing a strategy that does not include revenue generation they will make money in other ways – ways that might even be counter to the longevity of the business as a stand-alone entity.

There is often a tipping point where you start to see products being more aligned with market segments, different versions being created specifically for revenue generation, you might see acquisitions of smaller-yet-profitable businesses, etc. Generating revenue is very different than acquiring users. Many of the entrepreneurs standing behind Freemium made their money not from revenue generated by the services they worked for but by the sale of those companies or the IPO. Is this a bad thing? No… its great and we should all be so lucky. But it speaks to the underlying fact that Freemium is not about revenue generation as much as interest generation by others – acquirers, investors, or an ecosystem.

Now the latter of those three – ecosystem – is very exciting and a very real, sustainable, viable and profitable business can be built around that – M&A or IPO be damned. But do not for one second forget that it takes a substantial amount of funding to get to this point. All of this comes down to the fact that Freemium is itself not just one thing. There are five types of Freemium in use today (covered in a separate article) and the type of Freemium to employ must be based on many factors, including the time-line to reach goals. Freemium strategies are either short- or long-term.

Short-term Freemium strategies are used for market disruption, to get a foot in the door, crush an upstart competitor, etc. and is often used on existing product lines or new alternative products (as detailed in the original “The Reality of Freemium in SaaS” under Alternative Product Strategies). Long-term Freemium strategies are employed by those businesses built from the ground-up to leverage this pervasive go-to-market strategy and is where the idea that Freemium is a “business model” comes from. These companies basically put all their eggs in the Freemium basket and if it doesn’t work, it often leads to complete failure.

For short-term strategies, monetization occurs through more traditional methods often using the free version as a foot in the door for a brand to up- or cross-sell to more established products to new customers, market segments, etc. Aside from M&A or IPO as the method of “making money”, long-term Freemium strategies are designed to monetize in ways only possible at scale by tapping into the network effect, ecosystem, or ancillary revenue streams made possible only after “critical mass” (which is relative) is achieved.

Consider companies that build an audience and monetize through ads – critical mass occurs when they have enough eyeballs to get the advertisers attention. For some companies, like Spiceworks (founded in 2006 with $29M in funding so far), they’ve been able to monetize not only the eyeballs of their 1.2 million users, but the activity of those users by selling network effect data to the advertisers.

Spiceworks has 1.2 million free users, but only around 200 customers – the advertisers – and is a perfect example of the notion “if you aren’t paying for the product, you aren’t a customer, you are the product.” Over time, Spiceworks – who is really in the advertising business not the IT management business – has used network effects generated by their 1.2 million users to add more value to the offering for advertisers. Spiceworks is technically Freemium since users can pay a monthly fee to turn off the ads, but this is not promoted as they see advertising – not subscriptions – as their primary and most scalable revenue stream. Again, Classical Freemium is not present in a company many consider to be one of the most successful B2B “Freemium companies” around.

Evernote is another example of a company building a big enough audience to get the attention of those that will pay to have access to that service in other ways. Evernote has been the poster-child for Freemium over the last few years and while they are not an analog for most B2B SaaS companies, it is definitely an interesting study in how to leverage engagement or “investment” in your product to produce conversions. We should all be thankful to CEO of Evernote Phil Libin’s frank and open discussions of Evernote’s growth and even revenue. Evernote, founded in 2005 and having raised $45.5 Million over 3 VC rounds, worked hard to build an immense user base. Libin has shared that many users and customers alike access the Evernote service from multiple devices, therefore as the service grows, makers of devices that could access Evernote are taking note.

As of May 2010, the poster-child for Freemium was making $500k per year – a not-insignificant amount – from licensing (the ecosystem revenue stream) by mobile carriers and device manufacturers to pre-load the Evernote app for their customers. Carriers and device manufacturers want to attract the attention of the vast – and dedicated – user and customer base of Evernote to sell more devices or network access.

If Evernote had charged for access to their service from day one, not only would they not have reached the scale they have and arguably the amount of subscription revenue due to the aforementioned engagement-based conversions, the reduced scale would not have attracted the attention of those that want to buy access to – in the form of licensing – that user base. Evernote clearly has a long-term Freemium strategy that employs Classical Freemium, but they are not pure-play Classical Freemium since they also employ other revenue streams. Also remember that it takes millions of dollars – $45.5 million so far – to get to this point.

The moral of this story is – for the companies that saw success from a revenue standpoint with Classical Freemium, that success was achieved by raising a lot of money and using that to build a large base of free users. Once they reached a certain level of scale, they had to branch out – or finally could branch out – to other, more lucrative revenue streams. When we can literally point to just a handful of “successful” Freemium companies with few of those employing pure-play Classical Freemium at scale or even in a very long time, it is at best difficult to consider Freemium a successful “Business Model.” For some heavily-funded narrowband horizontal SaaS companies, Freemium and Free have been the key to gaining critical mass before employing monetization strategies outside the scope of Classical Freemium.

And the best companies out there – the companies that are really killing it even when they have the same or even a lesser feature-set than you – are doing the same thing.

They treat their customers and would-be customers like human beings.

They’ve figured out the “voice” they want to use based on their goal market position and everything they do – promotion, sales copy, service, training, etc. – revolves around the customer or user as a human being.

From marketing to User Experience, they understand that they’re selling a product not just to a real-life person, but for a real-life person to use.

They don’t write emails that sound like one robot wrote it to another robot.

They take the time to understand how their customer will use the product on a daily basis and strive to make it easier to use every day.

They use direct-response sales copy to connect with the person reading the message, even if they’re selling to Fortune 100 companies.

Pop quiz: Fortune 100 companies are made up of what? You guessed it. People!

You must speak the language of your target market and do so in a way that is congruent with their expectations.

Some markets require you to be more ‘professional’ than others.

But all markets are made up of humans, so speak, write, and interact like one.

This “human-centric” approach must go all the way through your pricing, market segmentation, and of course, in your Free Trials.

One of the really interesting things I’ve found is that the most successful companies don’t think in terms of “users” and instead think of their customers as “members” of their community.

This is a huge mindset-shift that once made, can change everything about your business.

Think about the potential effect on Customer Lifetime Value (CLV) that a shift from user-centric to member-centric thinking, messaging, design, etc. might cause.

When you came up with your pricing versions, for example, were you focused on ‘features’ or were you focused the people that would be buying your product?

You aren’t alone!

Unfortunately, so many of the underlying concepts that SaaS / Web App vendors pull – and make decisions – from carry over from traditional software, even going into 2012.

6 or 7 years after the term SaaS was coined, we’re still doing things like “software” companies.

That makes sense, I guess, since most of the pundits, analysts and “thought leaders” in SaaS come from traditional software backgrounds.

But to really be successful, you need to shift your thinking.

Look beyond software and traditional SaaS to non-software analogs such as subscription services, membership sites, and other recurring / continuity models for inspiration.

When coming up with your pricing, for example, these are the wrong things to think about:

Pricing Tier, Version or Bundle

Subscription Level

Features

Think instead about:

Logical groupings of customers

Cohorts

Levels of experience

Think of them as Membership levels instead of Pricing levels.

This can have a profound effect, but that is just a pricing example.

Think about how this might work in every other part of your business?

How did American Express differentiate itself from traditional Credit or Charge Cards?

Membership.

Membership has it’s privileges, right?

So, this is the wrong approach:

I’m going to give access to these features at this pricing level.

This is a better approach:

This group of customers will benefit from these features in these ways

Wrong way = Product / Feature Focused

Right way = People / use-case focused

So in 2012, I want you to consider changing your focus from “users” to “members” and see what amazing things can happen.

That is my plan, too.

In fact, I’m changing the Free Trial Dominator program to a Membership program with monthly payments for 2012 right now.

I hope you have a wonderful holiday, whatever it is you celebrate.

I’m a Festivus kinda guy, so our family will bust out the aluminum pole and air our grievances in a couple of days.

Peter Drucker famously said “The purpose of a business is to create a customer.”

I say “The purpose of a Free Trial is to create a customer.”

If you believe my version, then the Free Trial Dominator is for you.

I’m capping Charter Memberships at the first 10 members and I’ll close it down as soon as I hit that number.

I’m so excited about the the Free Trial Dominator because it’s a manifestation of my years of helping SaaS & Web App companies get more customers and generate more revenue.

I’ve literally helped 100’s of companies around the world, from super-tiny, bootstrapped Web App startups to the biggest names in SaaS (KISSMetrics, Zendesk, Hubspot, Constant Contact, to name a few).

And I saw the Free Trial – something all B2B SaaS & Web Apps have – as the major bottleneck in customer acquisition.

It doesn’t matter if it’s a no-touch, self-service sales process or if ahigher-touch, human-powered sales process is involved.

In my experience, most of the time if a Web App or SaaS vendor has a Free Trial, the vast majority of those who signed-up for the trial do not buy; recent research by Softletter and my daily conversations back that up as fact.

So in 2011… I set out to fix that.

Look, I consider the Free Trial Dominator to be your shortcut to turning your Free Trial into a Customer-Creating Machine.

I don’t know how to say it less bombastically… sometimes, the truth is just THAT AWESOME.

I mean, in the Group Coaching sessions in December (you’ll have access to the archived recordings when you sign-up to become a Charter Member today) we’ve already covered topics like:

Pre-signup Indoctrination

Calls to Action, Sales Copy, and Microcopy

Sign-up form optimization

Engagement Processes do’s and don’ts

How to move from Engagement to Investment

How to use Email follow-up sequences effectively during a Free Trial

Using Transactional Emails to drive conversions

Designing for conversion and for your audience, not for your peers or ego

And a bunch more.

Oh, and that is in addition to what is included in the Core Free Trial Dominator modules!

Look, what the Free Trial Dominator means to you and your company is very simple:

No more trying to figure this stuff out on your own!

No more turning to LinkedIn Groups or Quora for “the answers” when all you get is generic advice and consultants who don’t know what their talking about shilling their services.

Let me be very clear so there aren’t any misunderstandings.

The Free Trial Dominator IS NOT a lead-in for my consulting services.

In point of fact, it is a REPLACEMENT for my consulting services.

A better way to say it is that the Free Trial Dominator is the RESULT OF my consulting services.

I know what I know because I’ve been exposed to what has worked (and continues to work) – and what hasn’t and doesn’t work – in 100’s of SaaS & Web App vendors worldwide.

I even worked with some traditional – and massive – Software vendors in 2011 to improve their Free Trial results.

And I’ve boiled that knowledge down, synthesized it, and put it together for you so you don’t have to go through the same trial & error everyone else does.

Until now, I’ve charged upwards of $2000 to be a part of the Free Trial Dominator program.

And many have paid to join, understanding the value they’d receive not from the program, but as a result of the program and the increase in conversions and revenue.

But because there are two inputs to pricing – willingness to pay & ability to pay – I realized the one-time payment option was not right for everybody.

So I’m gonna make it even more accessible in 2012 by offering a monthly payment option of ONLY $99 or what amounts to $1188/year.

But I’m not offering that just yet… that’ll come in 1Q 2012.

Right now, I’m looking for a handful of Charter Members to join the existing group of Early Adopters.

This is a $594 value if you do the math: 6 months x $99/mo.

This is limited to 10 Charter Members and once I hit that number, that’s it… no more Charter Members.

Oh, and if you get in now, you can join the last LIVE Group Coaching Session of 2011 on Wednesday 12/28 @ Noon Eastern.

What You Get When You Join the Free Trial Dominator Program

When you become a Free Trial Dominator member you get what I call the 3 C’s:

Content, Consulting & Conversation

Membership provides you access to this ever-evolving and updated Content:

Pricing Page Success Formula videos (the full 5-hour series! last sold for $397!)

Master Class on Beta Testing & Pricing (60-minutes / $97 value)

Complete Group Coaching Call Archive

PLUS you get consulting & conversation in the form of weekly LIVE Group Coaching web meetings that you and all other members can participate in (ask questions, review your sites or workflows, help with copywriting and design, etc.).

Occasionally we’ll even have special guests join to share what is working for them, like when Wistia or OfficeDrop stopped by to share how they get their massive conversion rates.

And of course, I’ll record each session and post to the private site for you to watch over-and-over (or if you couldn’t be there live!).

This is limited to the first 10 Charter Members; I’m closing this down as soon as I hit that number.

Remember, join today and you can be on the Group Coaching web meeting – Wednesday 12/28 – at Noon Eastern.